Choosing a Retirement Income Strategy: Outcome Measures and Best Practices

The race is on to build frameworks to evaluate retirement income strategies for clients facing various post-retirement circumstances. Retirement income planning is a complicated process in which clients must balance competing tradeoffs (maximize spending, protect from income shortfalls, leave a bequest) over an uncertain lifespan. After providing an overview of the basic building blocks of retirement income strategies, this article seeks to explain best practices, highlight potential missteps and problems which may arise, clarify areas where controversies and disagreements remain, and suggest further enhancements and modifications to make retirement income frameworks as useful as possible. The best practices described here include a description of the approaches and products to be included in a complete framework, the use of simulations or scenario testing as a way to understand how strategies respond in a variety of market circumstances, the need to connect asset market return assumptions to current market conditions rather than historical averages, the need to apply consistent fees across strategies, the need to distinguish how outcomes will differ when using either survival probabilities or fixed horizons, and other matters. The article concludes with a discussion of evaluation criteria, which can be subdivided into three general groupings. These include measures focusing on downside spending in bad luck cases, measures focusing on overall or upside spending or translating spending into the value it provides, and measures taking into account remaining assets at the end of the retirement period.